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Tax evasion never ends well

There are many such examples of unrelated diversification prompted by the eagerness to save tax. This practice is also rampant among individuals. Anything that saves taxes baits them all. There are millions who still buy Ulips to save taxes, without understanding that is a long-term product. Many also sign up for large insurance premium that they struggle to pay.

| TNN | Updated: Dec 3, 2018, 16:27 IST

Highlights

Directing all investment decisions solely with an eye on saving taxes can end badly in the long run

(Representative image)

NEW DELHI: The puny two-wheeler was called Spitfire. It was 1988 and employees of my husband’s company were being offered this 50cc bike at a concessional rate. One had to run with it for a while, and at some point the engine would come alive and one jumped onto the seat. But what was a tea company like Brooke Bond doing with 50cc bikes? The answer holds many stories about the stupid decisions that businesses and individuals in India routinely take with a single objective—tax saving.

There are many such examples of unrelated diversification prompted by the eagerness to save tax. This practice is also rampant among individuals. Anything that saves taxes baits them all. There are millions who still buy Ulips to save taxes, without understanding that is a long-term product. Many also sign up for large insurance premium that they struggle to pay.

Compulsory saving brings us to the other popular choice—housing loans. Many think the tax concessions on buying property makes it a fantastic investment. They like the ideas of tax saving and owning an asset. They end up paying high interest on it. Also, these assets can be hard to sell when the need arises. When we hear stories of parents selling property to educate their children, we are speaking of those who are pushed to that point, as they have no other asset to fall back on. Our tax saving urbanites who have invested in small flats in distant suburbs, would neither sell nor make use of that asset.

There are non-salaried individual earners who will do anything to reduce their tax burden. The strategic investment decisions is driven by the active need to not disclose income. Thus money is spent lavishly so it is not accounted for, including investments in number of assets, from gold to property to a host of business enterprises. Businesses are set up with structures that are questionable and weak.

These practices do not always end well. While some of the money and assets are available to use, a lot more is invested with little regard for the long-term strategic interest of the family or the intended beneficiaries. While many opt for creative accounting of expenses and tax deductibles, and falsification and fictitious transactions are par for the course, these practices also complicate matters for inheritors and other beneficiaries.

What to do instead? First, record your accounts, investments and assets. File returns and keep the records. Second, don’t stash money away in low return investments and poor quality assets just to save tax. Those with professional incomes and enterprises, where they are sole proprietors, should subject themselves to the rigours of tax audit. If you want to sell off your business, or if your child wants to take over and expand it, having clean books will help. Don’t let your tax saving shenanigans undervalue your business.

Keeping good records and paying taxes as due will also make it easier for you to get loans and additional capital when you plan to expand. The taxman only cares for the sources of your income, and whether your assets are commensurate with your known sources of income. If we are only goaded by tax saving, we will end up with investments and assets we don’t need. If what we like and need also comes with some tax saving, that is a good thing. But directing all investment decisions with an eye on taxes alone, can end badly.

(The author is chairperson of The Centre for Investment Education and Learning)

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